Archive for January, 2010|Monthly archive page

It can’t afford to sack manager ’cause it will then owe him £16m. Liverpool are thought to be £245m in debt and adding another 6% to this total is not a joke.

“The Liverpool hierarchy intend to review Benítez’s position at the end of this campaign, one that has brought an early exit from the Champions League, FA Cup, Carling Cup and no Premier League title challenge, but cannot afford the maximum £16m he could claim if sacked. Hicks and Gillett would not face such a crippling bill should their manager walk away, although they hope to improve the club’s finances with new investment in the coming months.”

Great time for UBS’s survival to be questioned, when bonds held by GIC must be converted into UBS shares by 5 March, 2010.

[Reminder: In December 2007, GIC invested 11 billion Swiss Francs for these bonds that would give it 9% of UBS. It later had to invest an undisclosed amount to prevent a dilution of its stake when UBS called for a rights issue to cover mounting losses. Later the Swiss government had to take a 9% stake to cover yet more losses.]

Last August, it was feared that UBS would not survive if it were indicted in the United States for failing to provide details of tax evasion by US citizens (Note the concern abt UBS not surviving the indictment was not reported here: both in MSM amd bloggers). Its failure could have undermined Switzerland’s economy. And of course Singapore’s reserves.

Now: “The Swiss government on Wednesday backed off an agreement with the United States that required it to hand over the names of wealthy American clients of the Swiss bank UBS who were suspected of tax evasion.

‘The announcement, which came after two Swiss courts ruled that the disclosure of client names would be illegal because it would violate the country’s secrecy laws, threatened to open a new front in the investigation into UBS by the Justice Department.

‘While the Swiss cabinet … would continue talks with the United States on the matter … there was a risk that the United States would resume civil proceedings filed against UBS in a Florida court last year. That case sought to force UBS to disclose the names of 52,000 wealthy American clients suspected of tax evasion through UBS’s private bank.

‘That lawsuit was suspended in August when the Swiss government, acting on behalf of UBS during months of intense negotiations, promised to hand over 4,450 UBS client names.” Full article

So if no new settlement is reached, UBS can be indicted again. And the issue of whether it can survive will again be asked.

This is one jinked investment. Time for MM (GIC’s chairman) or Tony Tan (executive director) to go an visit some holy man to ask for the bad luck to go away?

Board, if you are helpless, say so leh? No shame telling shareholders that with you in S’pore and assets and business in a far away province in distant China. Even the Chinese emperors admitted that there were parts of China where they could do bugger-all.

“Albert Edwards [respected by institutional investors in the West), global strategist at Société Générale, likens the hubris among China bulls to the US dotcom boom – where the economy escaped lightly, but many tech bulls were ruined. He says: “A bursting would be really catastrophic for investors, not China. The aggression we get [for bearish views] is similar to the evangelical belief we saw in the tech boom, and we know what happened next there.”” — from FT.

So think twice if you want to buy S-Chips. A company like CapiaLand can survive a bust of the magnitude of the tech bust; but can yr run-of-the-mill S-Chip?

According to aNYT article, GIC may have invested US$100m more than our MSM reported.

“The Government of Singapore Investment Corporation, which made a $575 million secondary loan, and invested as much as $200 million in equity [note ST etc report this as US$100m: 100% less], stands to lose all of that.”

But to be fair to GIC, in the immortal words of the character Chuck (played by Steve McQueen) in the Magnificent 7, “It seemed a good idea at the time”, when the seven cowboys realised they were up against an army of Mexican bandits.

“At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

‘”Many of the other companies, banks, countries and pension funds — including the government of Singapore, the Church of England, the Manhattan real estate concern SL Green, and Fortress Investment Groups — that invested billions of dollars in the 2006 deal stand to lose their entire stake.”

‘This month, several of the secondary lenders sent letters to Tishman Speyer and BlackRock threatening foreclosure because of the default. The partners tried unsuccessfully to craft a new deal that would have involved them putting up “several hundred million dollars,” in return for restructuring the loans, according to one real estate executive briefed on the negotiations.”

Note GIC is one of the secondary lenders but it is not yet known if it was one the u/m poker players.

“The secondary lenders, he said, had “overplayed their hand” in the hope that they would get back some of their investment. Instead of being forced into bankruptcy, Tishman Speyer and BlackRock will walk away sometime after a new manager is in place.

‘This month, several of the secondary lenders sent letters to Tishman Speyer and BlackRock threatening foreclosure because of the default. The partners tried unsuccessfully to craft a new deal that would have involved them putting up “several hundred million dollars,” in return for restructuring the loans, according to one real estate executive briefed on the negotiations.”

SingTel is in the news because of reports that its successful bid for EPL rights made FIFA up the price for the World Cup rights for S’pore. Great screw-up: sabo Starhub, end up saboing S’poreans?

But S’poreans might want to know (not reported in MSM) that its 32% owned associate in India has just issued a set of bad results. Dominant operator Bharti Airtel announced a 2% (‘peanuts’ Mrs Goh Chok Tong would say) year-on-year increase in earnings in the fourth quarter. Bharti’s average revenue per user dropped 30% over the past year to US$7 per month.

Twelve companies all with big ambitions and plenty of cash are fighting a price war. Worse more players are coming.

So while the value of its Indian investment is in peril, it is focusing in S’pore on the entertainment biz. No wonder it is trying to sell a 25% stake in Optus at a highish valuation. It got to look gd somewhere.

“Anybody who bought property in the last six years has their equity pretty well washed out,” said Ray Torto, chief economist at CB Richard Ellis, a real estate firm. “People are looking back on that period as the peak of the madness, the bubble. The expectation was that there was always someone who would pay a higher price after you,” part of an article about the promoter of the investment that lost GIC about US$675 million.

“Instead of rents and values rising unchecked, the value of commercial office buildings in the United States has dropped 43 percent, on average, since November 2007, according to economists’ estimates. If unemployment continues to rise, an ugly situation could turn nightmarish,” it continues.

As to the promoter,

“Tishman Speyer, which has no corporate debt, earns fees for developing and operating the buildings but usually puts little of its own money into a deal … In the $5.4 billion Stuyvesant Town deal, for instance, BlackRock and Tishman Speyer invested only $112 million each of their own money, which they have written off … Tishman Speyer took $18 million a year in fees; company executives say they began waiving the fees in fall 2008.”

Temasek has big holdings in two Chinese banks: 4% of Bank of China and 6% of China Construction Bank.

So this is worrying: “For the banks themselves, the lending splurge threatens to undo significant progress made in recent years in reducing ratios of problem loans to total lending.” Part of of an IHT article.

It goes on:

“A decade ago, Chinese banks staggered under a load of bad debt, reported by the Bank of China at nearly 40 percent of their total lending in 1999. In 2000, the nonperforming loan rate for the major commercial banks in China stood at 29 percent, according to official statistics and in the view of many Western analysts who questioned Chinese accounting standards, it was probably far higher. Nonperforming loans are defined as those on which repayments are more than three months in arrears.

‘The government vowed to bring the rate down to 15 percent by 2005, and by the end of 2007 it had dropped below 7 percent. One factor behind this reduction was the need for Chinese banks to attract investment from private and foreign sources.

‘This steep decline to single-digit levels would seem to tell a heroic tale of a banking system that solved its problems, but not all analysts take it at face value. Skeptics say the cleanup was largely based on sleight of hand, involving specially established asset management companies, speculative bonds and fuzzy government guarantees that together did little more than kick the problem down the road.

‘Even the least cynical analysts acknowledged that lower ratios partially reflected the dilution of bad loans in a vast sea of new lending, some of which would go bad but was still too recent to register as nonperforming.

‘Yet such doubts and qualifications notwithstanding, few deny that some degree of bad debt reduction was genuine and that overall loan quality among Chinese banks has improved from the worst of times.

‘Now, however, new concerns are emerging over the state of Chinese banks and their balance sheets. Zhou Xiaochuan, governor of the People’s Bank of China, the country’s central bank, spoke publicly of such worries in early January, and hinted at a lending slowdown.

‘Large credit flows, “will not only go against the objective of economic structural adjustment, but will also pose bank lending quality risks,” Mr. Zhou said in a magazine interview.”

Note that the Bank of China said on Friday that it plans to sell up to Rmb40bn ($5.86bn) of convertible bonds toto boost its capital base and allow it to meet stricter regulatory and capital requirements following.In 2009, Chinese banks lent a total of Rmb9,600bn, more than double the volume of new loans made in 2008.

Note also that the announcement came just after the authorities acted to check surging loan growth by ordering some banks, including Bank of China, to temporarily suspend the granting of new loans.

As you will be aware, Beijing is worried about rising inflationary pressures and the quality of new loans, the by-products of its expansionist economic policies.

Why MU may have no money for new players even though it raised £504m via junk bonds. The bonds were sold in two tranches, one of £250m with a coupon rate of 8.75%, and another tranche of US$425m with a rate of 8.375%

One is Adrian Brass the manager of Fidelity American Special Situations fund. He is optimistic the rally will continue in the short term. He points out that corporate America has taken a bigger “knife to costs” than at any time in its history.

But longer term he is less bullish, gradually rotating his portfolio into stocks in sectors such as healthcare and IT services that can grow even as consumers and governments retrench, and out of cyclical stocks.

His colleague Anthony Bolton has said that the cyclical recovery would “run out of steam” in the first half of this year as investors came to terms with the subdued economic reality. This is the guy who is relocating to China because he is a China bull.

Napoleon had many good officers. So when he was appointing generals, he asked, “But is he lucky?”. He knew the importance of chance in his success and at his last battle, Waterloo, his luck ran out. But as one of the generals who defeated him said, “It was a near-run thing”.

NOL’s and other container lines’ shares are in demand, with the recovery in world trade expected to lift freight rates despite the surplus of ships. “[M]ore than a tenth of the vessels that transport the world’s manufactured goods in containers are idle. For most, orders to sail will not come for some time.”

(Aside, NOL tried not order new ships when David Lim returned to NOL, after a stint as an acting minister. He tot the other liners were crazy to order new ships despite a surplus. But in the end, NOL too joined in because the ordering frenzy continued. Sadly, it did so juz before the market turned, but didn’t order as many ships as its bigger competitors, though as it ordered late, it paid higher prices.)

Buy into NOL because of its operational gearing into a recovery, not because it is a highly geared financial play into shipping (it isn’t) or because it can buy cheapish assets and gear up (it’s not a buccaneer).

Short of plans to buy assets, NOL did not need the S$1.4b in raised last year. NOL, which had then S$400m in cash reserves, would have almost less than 2% net debt (45% of equity at the end of 1Q of 2009) against container sector average between 60 and 6 then

NOL intended to use about S$700m for investments and working capital, the remainder to repay debt.

So NOL was in a good position to buy ships at bargain prices from highly leveraged shippers in distress, and shipyards. And increasingly its gearing again in the process.

Imagine going into the next cycle with cheaply acquired ships and a gearing of 45%. Wow Bam. This didn’t happen. NOL is one of the most conservative container lines and took a higher proportion of its ships out of service than other lines to tackle over-capacity.

Moral of story –.

And one hopes it doesn’t try to fly by buying ships in a rising market.

There are the Greeks and Chinese buccaneers out there too on the prowl for ships. The only problem is they are geared above the safety lines on the sides of their ships. But in a rising market, they can borrow more. And a rising market means ship-owners and shipyards will be reluctant to sell.

CapitaLand has done a deal in China spending more than the S$2.7bn (US$1.9bn) it raised in November through an IPO of CapitaMalls Asia, its shopping centres subsidiary. (I had tot then lowering China exposure was the unstatedreason for the IPO.)

It bought for US$2.2bn seven sites located in Shanghai, Kunshan and Tianjin, taking the group’s Chinese portfolio to 36% of assets from 28%. It wants to increase its China exposure from 28% of assets to 45%. Hong Kong’s Orient Overseas International shipping group was the seller.

Funnily, this at a time when even the Chinese government is talking of a property bubble in China what with residential prices in the 70 main cities accelerated in November to the fastest pace in 18 months.

“Qi Ji, China’s vice-minister of housing and urban-rural development, has told the Financial Times that house prices have reached levels that were “obviously too high”, particularly in large coastal cities,” reports the FT.

Yes, yes: I know CapitaLand is into commercial space, offices and malls (Apartments are tagged on on the top). But recent US experience shows that the damage in the residential sector can affect the commercial sector.

Note that China super bull, Jim Rogers, is avoiding recommending property to investors: in 2008 he was negative about Chinese property.

Nothing to do with S’pore’s merits, or whether the government here is incompetent vis-a-vis HK, though note HK government officials are better paid than ours. It’s all about proximity to China and Korea: where the money is.

If Indonesia rises and if S’pore is respectful of Indonesia’s wishes, S’pore will have its day in the sun. Granted a lot of “ifs”. But remember the late 1970s and 1980s when Indonesia was the new Texas (“oil” territory). S’pore benefited economically.

And to those, “government always messes up” foreign journalists and their mindless local fans, revisit what happened to PSA and your “govmin is incompetent and S’pore is doomed” comments.

Spring cleaning my files recently, I notice that much had been written at the time about the loss of Maersk Line (2000) and Evergreen (2002) to the then new port of Tanjung Pelepas in southern Malaya. There were a lot of doom-and-gloom stories about the competitiveness of the port here, and by extension, that of S’pore.

But the loss of these two big lines did not stop S’pore overtaking HK as the world’s biggest container port by throughput in 2005. A title it still retains. Meanwhile, Tanjung Pelepas while doing well, has yet to snag another big line.

Moral: Never ever count S’pore Inc’s management out especially when it can fall back on the island’s historical strengths; something it has contributed to, though not as much as it is claiming credit for. Bear this in mind when the PM makes the case for salary rises for his cabinet and civil servants.

Winning FA Cup run could have been worth £8m, ask Everton. Investors will also be put off by damage to club’s image.

And if Reds don’t qualify for Champs League: “Given the current distribution in English football, the £30m, £40m, £50m you get from the Champions League is the key differentiator. Getting to the semi-final is worth £46m to £47m. Add in a few other factors like the increase in brand value, and it’s more profitable than winning the League.”

Liverpool: another Everton. A club with only a proud tradition; no money and no trophies. Could be worse.

The reason why China’s action was atwo-day wonder at most (except for penny stock punters — Catalyst index was down 6% on Friday): the tightening was “peanuts”. So markets decided to resume the “drugs, sex and rock-and-roll” partying; all aided by alcohol: “Kum pei, Bottoms up, Mud in yr eye”? Shades of Charles Prince’s infamous July 2007 quote? “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” the then CEO of Citi told the FT. The response at the time.

And yes, I know the Western markets took a fall on Friday. But let’s see what China does on Monday, not the decadent bourgeois West.

In anarticle speculating that SingTel was planning to sell off 25% of Optus in an IPO, Today reported: “SingTel, South-east Asia’s largest telecommunications firm by revenue, took control of Optus in 2001 through a bid valuing the Australian telecommunications firm at A$17 billion … The operator now values Optus at “more than A$14 billion” the second person said, without elaborating.”

So at least A$2 billion in value was lost at the very, very least.

But F&N shareholders should not worry too much that SingTel’s then CEO is now their chairman. After all the SIA CEO at the time when Richard Branson screwed Singapore Girl (He sold 49% of Virgin Atlantic to SIA at a mile-high price of£600m (US$960m). SIA still has the stake and the much talked about synergies have been quietly forgotten.) became chairman of OCBC. The Old Lady of S’pore banking has yet to receive even an indecent offer.

DBS’s shareholders may want to worry. SingTel’s then chairman is their chairman. And DBS has form in losing money (Dao Heng) and “treasured” customers (DBS HN5), and safe-deposit boxes (HK).

Juz a passing tot, “As Citi is to int’l and US banks, is DBS the S’porean and East Asian equivalent? The fat, rich kid loser always last to any orgy, but always caught with the pants down when the cops, parents, spouses come?”

The “future’s bright” buying we saw in the S’pore mkt in the first week of 2010 has turned to “no future” selling, since Tuesday. Looks like the penny-stock syndicates may have got their timing wrong. Watch out for forced selling as punters ignore margin calls.

Blame the Chinese government for spooking global mkts.

To recap:

— China increased the amount banks must set aside as reserves in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom.

— The central bank also raised interest rates modestly in the inter-bank market on Tuesday for the second time in less than a week.

If he is right then investors in CapLand, AsianMalls, Noble, Raffles Education better be careful.

On the other hand, they make take comfort, “his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored”. But then before Enron collapsed, his critics said he didn’t understand Enron’s biz model.

SE Asia had better hope that he is wrong

Asian exports to China soared at the end of last year according to a slew of data released last Thursday (not S’pore though, still not seen any), suggesting that Chinese demand is emerging as a stronger than expected engine of economic recovery in the region.

The biggest jump came in South Korea, which said December exports to China jumped 94% compared with the same month a year ago. Taiwan reported a 91.2% jump in the value of shipments for December, and Malaysia said exports jumped 52.9% in November from a year earlier.

“A possible major catalyst for SIAE [SIA Engg] is if parent company SIA decides to divest its substantial ownership in the company as it did Singapore Terminal Airport Services (SATS) earlier this year. SIA currently owns an overwhelming 80.6% stake in SIAE,” says Kin Eng Securities.

My tots in mid June 2009:

SIA does in specie share dividend of SIA Engg saying:

“Distributing shares through an in specie dividend will unlock shareholder value by giving SIA shareholders direct ownership of SIA Engg at no cost to them …The proposed distribution will allow SIA to concentrate on its airline business, something advised by MM Lee in 2004 … SIA Engg will be able to independently pursue opportunities to aircraft maintenance, repair and overhaul businesses. The Proposal will improve trading liquidity of SIA Engg shares, potentially enhancing value.”

ST Aerospace is the “Largest aircraft MRO company by commercial airframe man-hours” and has “Strategic partnership with RSAF”

Rights issue with Temasek taking up its entitlement and prepared to subscribe for shares that other shareholders don’t want.

Remember you first heard it here. But based on the companies’ past performance, SIA Engg should only buy ST Aerospace, if the price paid reflected Aeo’s lower margins. SIA Engg’s margins are consistently better than those of Aero. EG In financial yr ending Dec 2008, Aero’s turnover was S$1.9b with PBIT of S$272m, while SIA Engg turnover was S$1.1b but PBIT of S$301m.

But what price another national champion? And financial engineering by Temasek?”

If I were a small shareholder, I’d need some more information on what is happening.

Following last Sunday’s announcement that the three executive directors (EDs) had resigned, the independent directors (IDs), by then the only remaining directors, said mid-week they had made three new board appointments and re-appointed the former financial controller. Two were IDs and one was a non-executive.

But till time of this post, nothing has been heard about who is managing the company in the absence of the CEO or any ED in China. And if no one is managing, who will manage it and when? Waz the point of all these directors based here? Everything of value is in China.

The IDs should be telling shareholders what they are doing to ensure that the assets of the company are not plundered or the business is not misrun in the absence of the EDs. If there are already gd managers on the ground, shareholders should be told. If there are none, why were there no plans for managers to replace the EDs? After all the IDs were seeking to remove the then EDs. And when will the new managers are expected to be in place? Shareholders need this information.

Surprised

SIAS not publicly commented on this;

SGX not publicly querying company; or

none of the usual corporate governance pundits are even raising this issue.

But who knows, maybe behind the scenes? Somehow I doubt it.

Is all this corporate governance activity by the two IDs and talk by others, Wayang or shadow puppetry in its most sophisticated form?

A small shareholder might very well think that. I couldn’t possibly comment

If no regular decent runs in Champs League and FA Cup could end up bit like Leeds. Third run KO is not a decent run.

But isn’t Liverpool a better candidate to be another Leeds? Relegated to Europa League, not challenging for EPL top 4 position, no $ for players. The problem is MU’s debt: more than £700m, bigger than that of any other EPL club. And growing: it could amount to £1.1b by 2017 according to a Guardian piece (Warning: not an easy read if not into finance.). By contrast Liverpool’s debt is only £350m (though like MU’s rising).

It’s all because of the $ owing to three hedge funds. By the time that debt is due for repayment, in August 2017, the accumulated capital will have risen from an initial £138m when the Glazers refinanced in August 2006, to £580m. Then there is another £524m of bank and other borrowings which United owed at June 2008.

MU analysed in this article (warning: another boring read if not into finance) by Robert Peston, BBC’s financial editor. So that footie fans can focus on games, the impt bits of his analysis:

“One banker with a close knowledge of the club put it like this to me: Manchester Utd as a business is a delicately balanced financial machine, which works when the team is winning and revenues are pouring in, but where there is not much of a financial cushion to absorb the inevitable occasional flop.

‘He said that the huge debt that was taken on when the Glazer family bought the club was predicated on the basis that Man Utd would have decent runs in the Champions League and FA Cup in most years – which of course is typically what has happened.”

The junket rules that the authorities are likely to introduce will mean a slow start for VIP (high roller) volumes at Genting Singapore, at least in the short term. The Genting gp, I understand, has always believed junket operators are the key to its VIP segment.

So the VIP gaming volumes at Sentosa will take time build up. Note that the preference for using junket operators for the VIP segment reflects the more conservative nature of the Genting gp. Bad debts are the responsibility of the operators, not the casino. In return, the operators get a bigger share of the gamblers’ spending.

Bank of America Merrill Lynch analyst Melvyn Boey estimates VIP clients will account for about 50% of the business at the Singapore casinos. But of these VIP clients, only about 30% might be expected to be brought in by junket operators with most being ‘in-house VIP clients’. Now 30% of 50% sounds a lot to me, though he says it is “insignificant”.

I suspect he must be thinking of Sands rather than Genting S. Sands has said that it will rely on its in-hse VIP gamblers for Sands S’pore.

With a recent rally in its share price, Genting S now trades at over 17x 2011e EV/EBITDA. Sands China and Wynn Macau, with existing cashflows in the largest gaming. market in the world, trade below 11x. Even if EBITDA were 50% higher than consensus forecast, valuations are stretched. The recent selling in heavy volume could be a reflection that the institutional investors are realising this. Foreign brokers are calling a “Sell” at these levels.

Or the selling could simply reflect that falls in HK of Winn Macau and Sands China.

This US-centric piece is entitled “New Health Rule: Quit Worrying About Your Health”. It reminds that “moderation” should rule and that many people live reasonably healthy lives without thinking about it.

He created value from rubbish is one way of looking at it. An alchemist who turned lead into gold by persuading the government to rescue his investments.

“Pimco was a direct beneficiary of the Treasury Department’s actions. In 2008, when it appeared that Fannie Mae and Freddie Mac might fail, Mr. Gross saw an opportunity.

‘He moved Pimco’s flagship Total Return Fund heavily into mortgage-backed securities guaranteed by the two agencies. Then he vociferously advocated for the government to rescue them during television appearances on CNBC and elsewhere. On Sept. 7, 2008, the fund’s value soared by $1.7 billion when Mr. Paulson announced the government takeover of Fannie Mae and Freddie Mac.”

“Now that SIA has divested SATS, the company’s true value is more likely to be appreciated by the market. We estimate a surplus of $0.20/share that can be paid as dividends to shareholders if properties held at cost are sold and leased back,” writes Kim Eng Securities.

In mid-June 2009, I analysed SATs as follows:

Why new SAT shareholders should be grumpy

On May 14, SIA announced that it was going to distribute to its shareholders its 81% stake in SATS by way of a dividend in specie. Since then share price is up 5%.

This comes after SATS has become cash poor.

In January 2009, SATS launched a takeover bid for its Temask stable-mate SFI. According to the takeover documents, the pro-forma balance sheet as at September 2008 would have shown that the net cash position of the SATS (including SFI) group deteriorated to minus S$21 from S$528. In particular, cash in fixed deposits would have fallen from S$573 million to S$64 million.

But SATS needs cash because “SATS is committed to growing its 2 core businesses of airport and food services”. It could borrow big-time, pro forma net gearing is 0.04% from (0.35)%. But in Singapore, where debt is a dirty word in GLCs (NOL comes to mind), a rights issue is reasonably probable.

Temasek as the new controlling shareholder of SATS has $356 million from its sale of SFI shares to fund any rights issue. But do other new SATS shareholders have the cash?

Finally, looks like MM Lee gets his way. In 2004, he said SIA should divest itself of SATS and SIAEC. SIA’s management demurred. Will SAEC be divested despite SIA mgt saying last night that the SAEC holding is strategic? Stay tuned.

——-

Or will be both wrong, and CIMB prove correct? It doesn’t have any expectations of corporate activities, being underwhelmed by SATS.

After the Chinese police refused to proceed against the chairman as requested by the independent directors, the three executive directors resigned, leaving no-one to run the company. This mass resignations seems to be taunting the IDs as they are resigning after a favourable police decision. They had refused to resign for months and the IDs had to get a court order to call for an EGM to remove the EDs.

Adding insult to injury, the company said IDs “will continue to keep shareholders updated of all material developments”.

Err … But when BT asked the IDs for comments, they said that they are seeking to clarify the situation before issuing any response. As at the time of this posting, no annc has been made by the IDs.

They must be confused and worried because with the EDs resignation, no-one is managing the company. And some workers are threatening to strike over the IDs actions. And they could be sued by the chairman and shareholders.

Great way to start 2010.

They have the responsibilities and powers of directors but are powerless in reality. The co’s assets are in a far away province of a far away China. Taz the reality.

Well there is now an annc on company’s site saying that that the chairman had been cleared by the Chinese police of allegations made against him by the IDs.

Ouch! This is not good news for the IDs. It undermines the allegations that they are making against the EDs. As the Chinese docs are dated 25 Dec, maybe they knew about it and hence did not call EGM.

If I were an ID, I’d be concerned about the chairman suing, whether I have the appropriate insurance policy, and whether PwC can be sued. I”m sure PwC are consulting their lawyers and checking their insurance policies.

Wonder what SIAS will now say? They have been supportive of the IDs actions.

All goes to show: Taking an IDship in a company listed in one country, domiciled in another with assets in a third where there are problems with the rule of law is not to be taken lightly. It, like investing, in such a company can be the stuff of nightmares.

I nearly bought minibonds in 2007, and since the failure of Lehman Brothers last year, I’ve been trying to understand why I nearly bought them. It is important to me as it could help me avoid a future disaster.

I always knew why I didn’t buy — greed. Dr Money sums this greed up nicely when he wrote, “Your money gets invested in risky bonds and derivatives. It means total returns are much higher, like 13 per cent or more. But all you see is your safe-looking 5 per cent return.

Then there is the issue that if interest rates collapsed, the arranger could recall the note, while if inflation went to 10% (remember the price of oil then), I’d be stuck with 5%.

But I didn’t know why I nearly bought i.e. think it was a safe product, despite being “aware” of the risk premium. This is worrying. I could misanalyse again.

I’ve very recently come to the conclusion that my mind (without me being conscious of it — mindlessness in Zen) divided the risk element into two bits.

Risk 1

I “knew” (I was relying on the ads and a BT newspaper article) that

— I was (with many others) insuring someone against the failure of one of the six entities

— the product was highly leveraged

— derivatives were being used

— the combination of the last two meant that it was likely that if one entity got into trouble I would lose my money.

(Having read the prospectus last yr, the above points were confirmed.)

Risk 2

The probability of a default by Lehman or one of the entities.

My conscious mind came to the conclusion that the probability of default by Lehman or one of the six entities was very, very low (so far none of the six entities are in trouble). Dr Money had a great take on the improbability of an LB failure. I can do no better.

The very low probability of failure must have made me conclude that it was a safe product, and that LB had found investors who had mispriced risk — willing to pay the 13% mentioned by Dr Money. Not surprising as my experience as an arbitrageur (risk and straight) had taught me that risk is usually mispriced (investors are too cautious — Yes if I were still arbitraging, my employer would have lost big time in 2008 )

What has all this to do with forcing a settlement that Tan Kin Lian and others wanted? That the MAS refused to even think about. It told them to bugger off.

Supposing there was no mis-selling: investors in minibonds and DBS HN5 notes were told everything and I mean everything. Would investors still have bought?

I think that most would have. Of course they would deny this today. “They would, wouldn’t they?”

They would have been advised, and rightly so (at the time), that the very low probability of failure, meant that their principal was safe.

The lessons of the story- better to be lucky than smart and going for yield is dangerous.

(Been thinking more about this since I blogged on this topic a few weeks ago. This is an expanded and revised version.)

This writer agrees with Warren Buffett that buying low-cost index funds is the best way for most people to invest in equities. http://www.fisca.sg/financial_education?mode=PostView&bmi=189571

But he is not blind to the problems with index investing.

Even over 10 years, things can go wrong

— The return of the Dow to 10,000 (10428 on NY’s eve) serves as a reminder that US stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before reaching a high of 14,164 two years ago and falling to a low of 6,547 in March 2009.

— In 10 years the FTSE is only 25% lower. A lot better than the Dow but it too has been very volatile.

And longer term : “For those seeking solace in the conventional wisdom that stocks rise in the long run, consider this: 20 years after Japan’s stock market peaked, share prices are still less than 25 percent of their top values, ” from NYT article in March 2009.

All the above means is that buying index funds is fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds. (I hope to blog something on rebalancing in early 2010). In the meantime, an example of rebalancing http://www.fisca.sg/product_reviews?mode=PostView&bmi=210476

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter (you may need to draw on yr capital). Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demoralise you.

“It’s sadly ironic that the boom in tracker [index] funds at the end of the 1990s came at the most inappropriate moment possible,” says a BBC writer.

But the article implicitly points out that the alternative could have been a lot more worse. Read about the stocks that lost value and have little chance to recover.

At least an index fund can bounce back. Look at STI: STI started 2000 at around 2000. Went to a high of just below 4000 and on 31 Dec was at 2897. Just in March 2009, it was at 1455.

The moral of this piece: index but rebalance periodically. As I said, I will blog on rebalancing soon.